Big churn at Infosys, but the show must go on…

Companies and Sectors | Published on 19th August 2017

There was little by way of surprise when Vishal Sikka resigned on the 18th of August 2017. Like the man Sikka admires immensely, Steve Jobs of Apple, there was a sense of drama surrounding whatever Vishal Sikka did. There was a sense of drama in his arrival, there was a sense of drama when the board and the founders were at loggerheads and there was a sense of drama when Vishal Sikka finally stepped down. But first, what were the key contentious issues between Sikka and the founding members of Infosys, which eventually led to Sikka’s exit…

The genesis of the conflict between Vishal Sikka and the Infosys founders…

It is hard to pinpoint any particular reason that led to the eventual resignation of Vishal Sikka, but the indications were there all along. At a very broad level, it was a mismatch in the DNA of the founders with the DNA of the new CEO. There were 3 specific areas where these differences came out wide in the open. Firstly, there was the acquisition of Panaya, an Israeli company, which Infosys had acquired under the leadership of Vishal Sikka. There were whistleblowers who had complained about the opaque manner in which the entire deal was done as well as allegations of having overpaid for the target. Secondly, the promoters were not comfortable with the hefty hikes that the board was offering to Vishal Sikka despite the company not performing discernibly well. The founding members were keen to maintain a degree of rationality between top management and entry level employees, as was the norm originally. Lastly, there were serious issues of corporate governance that the founding promoters had raised. Both in the case of the Panaya acquisition and in the severance pay to CFO, Rajiv Bansal, the Infy founders were deeply disappointed with the levels of disclosure and corporate governance. For a company that had prided itself in setting the highest standards, that was the last straw.

To be fair, Sikka did bring about positive change…

Three years may be a short time to assess the performance of such a large company in the midst of transition. But Sikka did bring about positive changes. Their quarterly revenues have grown from $2.1 billion to $2.6 billion but the annual revenue target of $20 billion by 2020 may still be some years away. More importantly, during the tenure of Sikka, the attrition rate fell from 23% to 17%, which helped them to maintain operating margins above 24% despite a challenging revenue scenario. But the big difference that Sikka did bring about was in giving a very sharp and granular client focus. The number of premium $100 million plus clients went up from 12 to 19 during Sikka’s tenure. A sustained presence in the Valley surely made a difference.

What is the road ahead for Infosys from here?

It needs to be remembered that Infosys is a company that was built bottom-up on the basis of sound principles like thrift, conservatism and transparency. That, in a way, is the DNA of the founders and also the DNA of the company. The founders are right in insisting that the core DNA of the company needs to be protected to help the company maintain its unique identity. Having said that there are 4 immediate focus areas for Infosys…

The first challenge for Infosys is who should be the next CEO. The fundamental question is whether it should be from the promoter group or from outside. At the current juncture, considering the flux in the organization, the company should ideally opt for either an internal candidate who has been in the system long enough or someone from the promoter group itself. DNA mismatches do lead to such disruptions, as we saw in the case of the reputed Tata Sons, but businesses have to move on. After all, organizations have to outlive the people who operate and manage them.

Having worked out the smooth transition, the next challenge is bring its business focus back on the fast growing digital space. Competitors like TCS, Cognizant and HCL Tech are fast building digital capabilities and Infosys cannot be left behind on this front. Companies like TCS are already earning 18% of their annual revenues from the digital space. That is where most of the tech spending is happening and that is where the growth is likely to come from.

Infosys needs a broader institutional mechanism in place to handle differences between the board and the founding promoters. Remember, the founding promoters may own just 12.75% in the company but they have provided the DNA to the company. Therefore even the institutional investors will want to ensure that the board is able to carry the founding directors along. The need of the hour is to have an institutional mechanism where such differences of opinion can be red-flagged and sorted out constructively.

The immediate challenge for Infosys would be to handle the buyback of shares that has just been announced. Infosys had specially sought SEBI approval to provide an exit route for domestic and international investors who are invested in ADRs. This will be a real test for Infosys as it will test the appetite for the stock in the market. It will also indicate which side the key shareholders are veering towards and whether shareholders are looking at the buyback as an opportunity to exit the stock. Managing the public image of the company through the buyback will be a key challenge for Infosys.

The tenure of Vishal Sikka may be over, but then organizations like Infosys are much larger than the people who operate and manage them. The show must go on!

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